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What is Loan Against Property and How It Works

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Loan against property commonly known as ‘LAP’ is one of the secure forms of loan as the investor can use his property as security while raising a loan. Lending against property is sometimes necessary in cases like medical treatment, children’s education, marriages or starting up a business. Under a loan against property, a lender evaluates the current market value of the collateral property. In this article, we will understand everything about loans against property, how they work, their benefits, and a lot more. 

How Does Loan Against Property Work?

A Loan Against Property functions by using the borrower’s property as security. Here’s a step-by-step explanation:

1. Application Process

Start by filling out the application form with information regarding your current employment and the property you will be keeping as a mortgage. 

2. Property Evaluation

The lender evaluates the property’s current market value. Based on this valuation, a loan amount is sanctioned, usually between 50% to 80% of the property’s value.

3. Loan Approval

The borrower’s creditworthiness, income, and repayment capacity are assessed. Once the evaluation is complete and all documents are verified, the loan is approved.

4. Disbursement

The approved loan amount is disbursed to the borrower, which can be used for various purposes such as education, medical emergencies, business expansion, or debt consolidation.

5. Repayment

The borrower repays the loan in Equated Monthly Installments (EMIs) over the chosen tenure. If the borrower defaults, the lender has the right to sell the pledged property to recover the loan amount.

Key Features of Laon Against Property

The following are the key features of Loan Against Property: 

  • Loan Amount: In a loan against property the loan amount provided is generally the percentage of the property’s market value. Depending on the assessment and valuation, lenders might offer up to 60-70% of the property’s value as the amount of the loan. 
  • Interest Rate:  The interest rates are generally lower in loans against properties compared to unsecured loans. This makes it an affordable and attractive financing option. Depending on the lender’s policies and the borrower’s preferences the interest rates might be fixed or floating. 
  • Repayment Duration: The repayment duration is flexible ranging from  5 to 20 years. 
  •  Loan Distribution: The loan amount is disbursed to the borrower’s account when all the verification of documents is done. The borrower can then use the funds for the intended purpose.

Benefits of Loan Against Property

The following are the benefits of a loan against property: 

  1. Lower Interest Rates: Being a secured loan, LAP offers more affordable interest rates compared to personal loans.
  2. Larger Loan Amounts: High-value properties enable borrowers to secure significant funds.
  3. Longer Repayment Periods: Extended tenures make EMIs more manageable, easing financial strain.
  4. Continued Property Usage: Borrowers retain the right to live in or use the property pledged.
  5. Tax Benefits: If the loan is used for specific purposes like business or property purchases, borrowers may claim tax deductions.

Things to Consider Before Taking a Loan Against Property

The following are the things to consider before taking a loan against property: 

  • Valuation Accuracy: Ensure the property is correctly valued to get the best loan amount.
  • Repayment Capacity: Analyse your financial situation to avoid defaults.
  • Interest Rates and Charges: Compare interest rates and additional fees among lenders.
  • Risk of Property Loss: In case of default, the lender can seize and auction the property.
  • Prepayment Penalties: Check if the lender charges penalties for early repayment of the loan.

Conclusion

Loan against property is a flexible and cost-effective financial solution for individuals needing substantial funds. By leveraging their property, borrowers can access high-value loans at competitive interest rates and with extended repayment terms. Similarly, borrowers exploring options like loan against shares interest rates should carefully evaluate terms and repayment capabilities. Selecting a trustworthy lender and planning wisely ensures that such financial solutions help achieve goals while retaining ownership of valuable assets.